Explainer: What is a recession?

This article was updated in February 2024.

Two G7 economies slipped into recession at the end of last year - Japan and the UK - as consumer spending slowed.

The UK saw its slowest annual growth rate since 2009, while Japan dropped from third to fourth largest economy in the world, Bloomberg reported in February.

In its Global Economic Prospects report in January, the World Bank said risks of a global recession in 2024 had receded thanks to the US economy performing better than expected in 2023.

Still, continued fallout from the COVID-19 pandemic, wars in Ukraine and the Middle East, and persistently high inflation leave the growth outlook for 2024 "sluggish", with the global economy facing its "weakest half-decade performance in 30 years", the World Bank said.

But what exactly is a recession and how do we decide if one is happening?

There is no official, globally recognized definition of a recession.

In 1974, US economist Julius Shiskin described a recession as “two consecutive quarters of declining growth”, and many countries still adhere to that.

However, the US has since opted to use a more open definition. The National Bureau of Economic Research (NBER) looks at a variety of factors when deciding whether or not America is in recession. The institution defines the event as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.

"A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough."

Like national recessions, a consensus on the definition of a global recession has yet to be reached. The World Bank’s main indicator of a worldwide downturn is multiple major countries’ economies contracting at the same time, as well as other evidence of weak global economic growth.

The world economy has gone through four major downturns over the past seven decades, in 1975, 1982, 1991 and 2009. Recessions typically last for about a year in advanced economies, according to the IMF. The NBER’s data supports this: from 1945 to 2009, the average recession lasted 11 months.

Besides a prolonged decline in gross domestic product (GDP), one of the most obvious measures of a recession is the unemployment rate. When this begins to rise, it can trigger a domino effect of economic consequences as demand for goods and services slows down. During the last global recession, unemployment hit 9.5% in the US, according to the Bureau of Labor Statistics.

Although employment is high in many major economies, sentiment – another key indicator – remains low on the consumer confidence index despite having improved in 2023. This is due to factors such as the cost of living crisis leading to less spending, which can cause the economy to contract and tax revenues to decline.

Global growth has shown resilience in 2023 and inflation rates are falling faster than expected, but world trade growth – a predicted 3.3% in 2024 – is still well below its historical average of 4.9%, according to the International Monetary Fund (IMF). In fact, the IMF expects growth to decline in advanced economies this year before rising again in 2025; stable growth is expected in emerging and developing economies during 2024/5, but with regional variations.

Stock markets are also likely to struggle during recessions. As consumer confidence and spending decreases, companies may be forced to lay off workers, which can lead to poor investment performance and panic in the market. In the 12 recessions following World War II, the US index of stocks – the S&P 500 – contracted by a median of 24%, according to Goldman Sachs.

Unemployment could rise. Graduates and school leavers may then find it more difficult to find jobs. Companies may struggle to pay their workforce or give their employees pay increases to match inflation, according to the Institute for Fiscal Studies. Investors could also see losses, as stock markets fall. During a recession, we may see an increase in foreclosures, and banks will be less likely to loan money to potential borrowers looking for a mortgage or a personal loan, according to Forbes.

Central Banks can lower short-term interest rates. This can increase consumer confidence and stimulate spending, as the cost of borrowing is lower, meaning the cost of buying items such as cars and homes is also less.

To keep unemployment at bay, governments can introduce policies such as tax cuts to help consumers, or launch infrastructure programmes, including construction of roads and railways.

Recessions end when growth resumes again, no matter how slowly this happens. During the Great Recession of 2008, for example, governments introduced a number of quantitative easing measures, pumping trillions into the global economy in an attempt to resuscitate it. Following this unprecedented level of stimulus, markets began to recover, although lingering scars like higher unemployment and lower average income levels remained many years later.

Elevated geopolitical risks mean prices will likely remain high for key commodities, including oil and gas, rating agency Fitch predicts.

The World Economic Forum's latest Chief Economists Outlook finds a mixed picture for the coming year, with just over half of the chief economists surveyed (56%) expecting the global economy to weaken and 43% foreseeing unchanged or stronger conditions.

However, there is more uncertainty on the horizon as it's also a major election year – for the US, the world's largest economy, and around the globe – as the Forum highlights in its Global Risks Report 2024.